Question

Use the following information to answer the next two questions. Teller-Morrow purchases a coal mine for $3,000,000 and spends an additional $1,000,000 getting the mine ready for use on January 1st 2020. At the end of its life (5 years), it will cost 500,000 to restore the land to its previous state (the mine land has no residual value). For depletion estimates, they expect to be able to extract 1,000 tons of coal from the mine. In the first year, Teller-Morrow extracts 500 tons of coal and it costs $1,000 per ton to extract the coal. They sell 300 tons of coal for $10,000 per ton in the first year. The effective interest rate is 10 percent.

Before extraction begins, what is the book value of the coal mine? Round to the nearest dollar

How much Accretion Expense is recorder in 2021?

What is the book value of ending coal inventory at the end of 2020?

Answer 1

Present Value of restoration Cost = $500,000 * PVF(10%, 5Years) = $ 310,460

1. Book Value of Coal Mine = $ 3,000,000 + $1,000,000 + $ 310,460 = $ 4,310,460

2. Accretion Expense for the Year 2021 = $ 34,151

Accretion Expense Table:

Year	Opening Balance	Interest @ 10%	Closing Balance
2020	$      3,10,460.00	$       31,046.00	$ 3,41,506.00
2021	$      3,41,506.00	$       34,151.00	$ 3,75,657.00
2022	$      3,75,657.00	$       37,565.70	$ 4,13,222.70
2023	$      4,13,222.70	$       41,322.27	$ 4,54,544.97
2024	$      4,54,544.97	$       45,455.03	$ 5,00,000.00

3. Book value of Closing Stock = 200 tons * $1,000 = $200,000